ETF investors dumped European equities in the first half of 2018, Morningstar Direct data reveals, as sentiment towards the area continues to wane.
After a strong 2017, helped by the global synchronised upswing in economic growth, many commentators entered this year positive on European equities, which were seen as having more upside relative to the US.
As a result, investors pumped €3.7 billion into European equity-focused ETFs in the first three months of 2018. However, that trend has seen an about turn since March.
Political turmoil in Germany, Italy and Spain has weighed on the region, while economic growth in the eurozone has slowed. In a further headwind for the larger exporters, the euro has strengthened.
Indeed, the Citi economic surprise index in the euro area has now turned negative, compared to that in the US, which is firmly in positive territory.
As a result, the second quarter of 2018 has seen net outflows from European equity ETFs to the tune of almost €9 billion. All told, outflows for the first half of 2018 total €5.1 billion.
Large-cap equity funds were hardest hit, with the Lyxor Euro Stoxx 50 DR ETF (MSED), iShares Euro Stoxx 50 ETF (EUEA) and iShares MSCI Europe ETF (IMEA) hardest hit.
Elsewhere, country-specific funds also saw big inflows, with the Bronze rated iShares Core DAX ETF (EXS1) seeing €821 million outflows, as Angela Merkel’s coalition Government continues to come under pressure.
Unsurprisingly, the Lyxor FTSE MIB ETF (MIB) also suffered thanks to the election of a populist Government and the threat of the appointments of several Eurosceptic ministers, which failed to materialised.
Can Europe Bounce Back?
Despite growth in the euro area slowing, Mark Burgess, chief investment officer at Columbia Threadneedle, suggests purchasing managers’ indices on the Continent “look to have bunced off the bottom”. He reckons growth of 2% in 2018 will still be “decent”.
And European equity fund managers have not been deterred, despite softening earnings numbers and macro data. These “reflect a mid-cycle slowdown, rather than the end of the economic recovery in Europe”, according to Dylan Ball, head of European equity strategies at Templeton.
Ball notes that European equities tend to outperform in the latter stages of an economic cycle, which is what we are currently in.
On portfolio positioning, Ball says he’s finding value in banks and energy companies, which are “multi-year restructuring stories and still growing their earnings”.
“Yet the market tends to reward the stocks with valuations at a fraction of technology or consumer staples,” he adds. “European banks, for example, are still some three years behind US banks in terms of restructuring and relative valuations are telling us this.”
